Capitalism For All .com

My concept is simple. Here it is: Invest as much of your paycheck as you can throughout your life. As soon as you receive each dividend and interest payment from your investments, spend it whenever and however you wish. It is your reward for investing as much of your paycheck as you can manage.

Here are some suggestions that will help make this plan work for you: DO NOT reinvest your dividend and interest payments. DO NOT spend you dividend and interest payments on household expenses such as mortgage, rent, electricity, etc. Spend the dividend and interest payments on FUN things such as restaurants, movies, travel, etc. Spend the payments on whatever you enjoy; probably the more frivolous the expenditure, the better

This is probably the reverse of financial advice that you have received all your life. You have probably been taught the magical powers of compounding. That is, if you reinvest all your dividends and interest throughout your life, then your investment will grow exponentially because you will be earning dividends and interest on prior dividends and interest. Thus, by just investing a reasonable amount of your paycheck each period, you'll be able to retire as a millionaire!

Then why do so few people manage to save much at all for retirement?

There is a HUGE psychological component to investing that financial advisors just don't take into consideration. Psychologically, money invested feels like money that is thrown away.

There are many demands on our paycheck right here and now. First, we all tend to adjust our "Standard of Living" to the size of our paycheck. Where we live, the car we drive, where and how often we travel, how often and where we eat out, and many other factors vary based on how much we can afford from our paycheck. Unfortunately, many of us even live beyond what our paycheck can afford. After covering all these day to day expenses, it seems like there is nothing left over for saving from our paycheck.

Retirement seems so far away. We can reduce our savings for retirement, or completely put off saving anything for retirement without any impact on our day to day lifestyle, today. The reverse is not true. The more we put away for retirement, the more we have to sacrifice today. Since the reward for this sacrifice might be many decades away, it seems like we are just throwing this money away. The money vanishes from our wallet with no apparent benefit. What is worse is that we have to forgo everything we may have wanted to spend that money on today. In return, we don't see any benefit.

No wonder most people spend their entire paycheck now and put off retirement planning to some undetermined time in the future.

Unfortunately, the miracle of compounding that you have been taught all your life becomes less and less effective as you get closer and closer to retirement. The miracle of compounding is most effective when you are at the beginning of your work years, when you are least concerned about retirement. Most people don't get really serious about saving for retirement until there is so few earning years left that the effects of compounding will have little effect on their retirement savings. So much for the miracle of compounding!

Forget about the miracle of compounding. Dreaming about all the millions you'll have in retirement is not enough motivation for most people to make the sacrifices necessary today to reach their retirement goal. If you are already within a decade or so of retirement, compounding isn't going to have enough effect to motivate you at all. Starting late in the game, you may start to make sacrifices out of necessity to build some retirement savings. However, you will probably not be adequately motivated to make the sacrifices today that are really necessary to build an adequate retirement savings.

The whole problem with why we don't save enough for tomorrow is because we want to spend our money today. From a psychological viewpoint, people need to be rewarded TODAY for making all the sacrifices TODAY for building their savings for tomorrow. If people experience a benefit from their behavior today, they are more likely to persist in that behavior. Thus, people need to experience a more present reward for their saving behavior than some fuzzy conceptual reward of having a comfortable retirement in the far off future.

How can people be rewarded for putting money aside from their paycheck today? The most obvious answer is to let them enjoy the benefits TODAY that are produced by those savings. Money that is saved, especially money that is invested wisely, produces interest and dividends. The more money that is invested, the greater the interest and dividends. Allowing people to spend their interest and dividends on whatever they enjoy as soon as they earn it seems to be the best way for people to reward themselves for the sacrifices they have made to put their money aside.

The key here is to develop the attitude to not spend ones paycheck frivolously. Every penny from one's paycheck should be carefully budgeted. Every effort should be made to put every possible paycheck dollar into savings. The reward is that the interest and dividends paid out from savings and investing can be spent right now in any way that one likes. In turn, this will encourage more savings since a greater amount of savings will create even large dividend and interest payments to be spent in any way that one wishes.

The most important psychological factor is to encourage people to save as much as they possibly can, and get started saving as early in life as possible. Teaching the miracle of compounding does very little to motivate most people to sacrifice today for the benefits of tomorrow. Letting people experience today the benefit of growing investments will go a long way to encourage people to put aside as much as they can from every paycheck.

Once people really start looking forward to the arrival of each dividend and interest payment, the concept of how they can increase this monthly reward by saving even more will become obvious. They can now see that they have the option of sacrificing some of their standard of living (a less expensive home or car, etc.) for instead receiving greater and greater interest and dividend payments each month.

Some sacrifices may not turn out to be sacrifices at all. Everything is just approached from a different psychological perspective. Instead of feeling guilty about spending some of this week's paycheck going out to eat at a nice restaurant, or taking a vacation you knew you couldn't afford, you will be able to pay for those same things from the interest and dividend payments that you receive. There is no need for guilt as you have earned these things because of your diligent savings program.

As time goes on, the monthly dividend and interest payments that you receive will grow larger and larger. It is very important to understand the concept that this money can be spent without guilt on whatever you enjoy. It is money that you never would have had if you hadn't sacrificied to build your investment. As the amount you receive each month grows, you will be able to afford more costly expenditures. You will begin to greatly look forward to your dividend checks each month, and each received check will be further encouragement to save even more of your paycheck.

In addition to being rewarded today for today's sacrifices and savings, you will have the satisfaction of knowing that you are building an excellent nest egg for retirement! The day will eventually come when your interest and dividend payments will be so large that you may decide to retire early and just live off these payments. Or, you could continue to work and put your entire paycheck into your investments, causing them to grow at an even faster rate (as well as greatly increasing the dividend and interest payments that you receive each month!).

A side benefit of this method is that you won't be approaching your retirement financial situation as a mystery. Year by year you will see the income that you are receiving outside of your employment earnings growing. You will know that once you stop receiving a paycheck, you will continue to receive the interest and divident payments. It will always be clear to you first hand how much you can live on once your paycheck stops. This alone will put you in the driver's seat in getting financially prepared for retirement.

Some will say that your investments will barely grow at all if you have all your interest and dividends paid out. That isn't true at all! More details will be added about this later, but in short, your money should be invested broadly in the stock markets of America and the world. Over time, these markets have grown at a significant pace. Your investments will grow at the pace of the overall economy, primarily in America, but also throughout the world. Your wealth will continue to grow with the growth of wealth in America and the world. Thus, by the time you reach retirement, you will have a lot more money than you ever put in, even though you have taken all of the interest and dividends that your investments have earned for you.

So far, all I have talked about is spending the interest and dividents from your investments. These payments will continue on forever so long as you never spend any of the capital of your investments. Once you do retire, you may wish to consider drawing down on your capital investment to increase the amount that you have available to spend each month. This should be done with the advice of a CPA or other competent financial planner, but this is a common practice used by most people in retirement to boost their monthly income and standard of living. Some people wish to pass some or all of the capital part of their investment to their heirs, or to donate their pricipal to charity after their death. A Financial Planner can help with these details. Just keep in mind that there is more than just the interest and dividends available to you upon retirement. There is also the entire principal investment that you have saved over the years!

Summary Points:

Yes, investing a set amount of money out of every paycheck all your life and reinvesting the interest and dividends will produce a far larger nest egg by the time you retire than if you spend the interest and dividends. However, because of human nature, I believe that most people will put aside far more money out of each paycheck if they are allowed to spend the interest and dividends from their investments as those payments are received. Furthermore, I believe that most people are more likely to stick with such an investing program and will even be encouraged to increase their contributions to it knowing that it will result in them receiving greater and greater interest and dividend payments.

You might think this concept is not for you if you are a diligent saver towards retirement. In most cases I think that you will find you are wrong and that this concept can really be of benefit to you. If you are a diligent saver towards retirement, especially if you are using tax free or tax deferred plans like IRAs, 401Ks, Roth-IRAs, etc, don't change anything you are doing with those plans. Instead, open up a new investment account. Put as much into that as you can out of each paycheck above and beyond what you are already saving toward retirement. But, give yourself the luxury of taking all of the interest and dividends from this new investment and spending them any way that you want. You might amaze yourself with the additional amount of money you find yourself saving above and beyond your existing retirement program!

More to come !!!

Disclaimers: The above is provided for informational purposes only and is not and should not be construed as legal or financial advice. Advertisements on this page are not endorsed by me and might be totally opposite of the concepts introduced on this page.